Option Investor
Newsletter

Daily Newsletter, Wednesday, 3/25/2015

Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews

Market Wrap

Strong Selling

by Keene Little

Click here to email Keene Little
Today saw strong selling across the board, which hit most sectors except the energy and commodity sectors. The selling was steady all day, indicating distribution of stock by the funds and some technical damage was done to the charts. But the bulls could pull another rabbit out of the hat if they rally the market starting in the morning.

Wednesday's Market Stats

This week's decline has been strong but when you look at the past three weeks you can see we're just playing follow the bouncing ball. I've highlighted a couple of the indexes we typically follow to show the recent volatility. Look at NDX as an example -- down nearly 144 points for the week ending March 13th, followed by up nearly 144 points last week and now down 129 points so far this week. If you don't like the market's direction, just wait a week.

Week's Market Stats

This morning's economic reports showed a continuation of the deterioration of our economy but that didn't matter to the equity futures market, which actually rallied on the pre-market news and created a little gap up for the cash market at the opening bell. But then the sellers hit and they were merciless to the bulls. There were two brief periods of consolidation, one in the morning and the other in the afternoon, but the selling was steady and the volume was strong. It looked like a clear distribution day and the selling did some technical damage to the charts. The bulls have an opportunity to get themselves back on their feet but they'll need to get started immediately Thursday morning.

The Durable Goods Orders report this morning showed a decline of -1.4% (-0.4% excluding transportation), which was worse than the +0.4% (+0.3%) expected and much worse than January's upwardly revised +2.8% (0.0%). Just about every report we've seen for the past month or two has shown us a steady decline in economic output and even though the market has believed this is a good thing, because it keeps the Fed accommodative by not raising rates by a measly 0.125%. How long the Fed can jawbone the market higher (or at least not to sell off) is the big question but perhaps today started to answer that question.

The other report this morning was Crude Inventories and it showed an increase of 8.17M barrels in the past week, which was less than the 9.62M barrels added the previous week. Whether or not that had anything to do with the rally in crude, which was up +3%, the energy sector and commodities in general were some of the few things in the green today.

Chicago's Fed President Charles Evans gave a speech early this morning in London and he continued the FOMC's dovish stance. He believes the costs of raising rates too soon outweigh the risks of raising them too late and therefore believes the Fed needs to wait until 2016 before thinking about raising rates. That was a bullish message for the market but it was ignored. Are we starting to see cracks in the foundation with the selling of good news? Perhaps it's the market starting to get worried that we have a Fed that is trapped -- they've now painted themselves into a corner and they're going to get paint on their feet and ruin all the "good" work they've done no matter which way they go. They're trapped and it's only a matter of time before the majority in the market start to understand that.

There wasn't much else in the news today so I'll jump into a review of the charts, starting off with the SPX weekly chart. It shows price has more or less traded sideways since the strong rally off the October 2014 low. The first time it climbed above 2065 was on November 21, 2014 and that level has been crossed multiple times since then, including today's decline. SPX has worked its way marginally higher over the past four months but it hasn't been able to make much progress. There is a possible rising wedge off the October low, the bottom of which is the uptrend line from October- February, currently near 2068. A drop below the March 11th low near 2040 would indicate the top is probably already in place but in the meantime there is still the potential for another rally leg into April with an upside target at 2140-2150.

S&P 500, SPX, Weekly chart

SPX dropped below its 50-dma, near 2068 (today's low was 2061), and price-level support near 2065. It stopped on its uptrend line from October-February, near 2061, so any continued selling Thursday would mean a break of multiple levels of support. A 1-day minor break today is no big deal but a close below 2060 tomorrow would be a bigger deal and something the bulls would have to be worried about. The next level of support is the 200-dma, near 2010, but until that happens we still need to watch for the possibility of another rally leg to complete its large rising wedge pattern from last October. These patterns are full of choppy price action with lots of whipsaws, which is certainly something we've seen. The tops of the rising wedge patterns are near 2140 (the trend line along the highs from December-February) and 2150 (the trend line along the highs from July-December, 2014), hence the upside target zone for a final rally leg. But this requires the bulls to step back in tomorrow and flush the bears back out again.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2114
- bearish below 2060

The 60-min chart below shows the break of the uptrend line from October-February, which was also broken marginally at the March 11-13 lows. Another opportunity for the dipsters here but they can't waste any time doing it. If today's decline, especially the push lower into the close, was designed to flush some weak longs and suck in shorts, to help provide buying power for the next rally, it should start with a gap up tomorrow morning. That would create a mad scramble by both sides to do some buying, something the HFTs love to trade. As noted on the chart, two equal legs up for the rally off the March 11th low points to 2136.39, which crosses the trend line across the highs from December-February on April 2nd. This pattern supports the idea that we could see an effort to make a new high by end-of-month/quarter. But the bearish pattern suggests the selloff from last Friday is impulsive, which means a change in trend to the downside. That calls for a bounce correction but one that should be shorted for what would be an even stronger decline in a 3rd of a 3rd wave down. First we need to see a bounce and then second we'll need to see if it sets up a nice 3-wave bounce with at least a 50% retracement. That would be the opportunity to try the short side, keeping in mind the upside potential.

S&P 500, SPX, 60-min chart

One of the key points to make about the rally off the mid-March low is that it's different from previous rallies. Traders have come to expect v-bottom reversals and then get long and hang on. But instead of a constant bid under the market since that low, as we saw off previous lows, we've had some significant pullbacks along the way, especially the past two days. From March 12th to the high on Monday we had an alternating sequence of red and white candles, which is different from the rallies off the October, December and February lows. This is a change in character to the market that deserves attention. And now with the stronger selloff since Monday, which follows a lower high against the March 2nd high, there is the potential for a more significant decline to follow. The key level to the downside for the DOW is 17620 (the March 12th low) but for now, holding above the uptrend line from October-February, near 17677 tomorrow morning, keeps the potential alive for another rally leg into April.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 18,100
- bearish below 17,620

Hurting the tech indexes today were the SOX, down -4.6%, and the biotechs, which have been getting clobbered this week. BTK is down nearly 9% this week and down -4.3% just today. The high-flying index has seen a lot of profit taking this week, which is another example of risk-off. But it should be noted that the BTK index (and the IBB ETF) left no bearish divergence on either their weekly or daily charts at last Friday's highs. That could mean there will be at least a retest of those highs before potentially putting in a longer-term high. For now it's just a warning to bears.

As for the tech indexes, today's decline for NDX and the Nasdaq is just pure ugly if you're a bull. That's a nasty-looking red candle and the series of red candles following Friday's gap up and smallish doji candle last Friday makes it look like an exhaustion gap up on Friday. And the significant bearish divergence at last Friday's high, which leaves a double top in place, certainly favors the bears. But all is not lost for the bulls yet, especially with the 50-dma, near 4322, not yet tested. Its uptrend line from October-February is currently a little lower, near 4310, so a stronger signal of a breakdown would be a drop below 4310, especially on a closing basis. For now the uptrend is still intact so bears need to respect that, but clearly the bulls need to step back in if they want to keep control of the tape.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4479
- bearish below 4310

Talk about an ugly red candle! The RUT saw some serious profit taking today and experienced the strongest down day since last October's low. That's what you call long covering after so many kept chasing this index higher but pulling their stops up as they went. The index gave back everything it had gained since March 12th and dropped back below its March 2nd high at 1243. The RUT was one of only a few indexes that was able to climb above its March 2nd high but it has now quickly joined the others in giving up the bulk of the rally off the March lows. But as with the others, there is still a chance for the bulls to step back in and pull a reversal on the bulls. As long as it stays above its uptrend line from February 2nd, currently nearing 1215 and its 50-dma at the same level, there remains the potential for another rally leg to another new high. The upside target, if a new rally leg gets going, is near 1288 where it would again back-test its broken uptrend line from March 2009 - October 2011, as well as the top of its up-channel from January, with both lines crossing that projection on April 2nd (the same date projection mentioned for the SPX 60-min chart).

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1266
- bearish below 1206

Treasury bonds also sold off some today so money wasn't rotating out of stocks into bonds. Today's selloff in the stock market looks to have been just profit taking (at least for now) and moving into cash. We'll have to see if that pattern changes in the next few days. Looking at the longer-term chart of the 30-year yield (TYX), the bounce off the January 30th low followed by the decline from March 6th leaves us with a 3-wave bounce and that suggests just a correction to the longer-term decline and lower lows to come. We could see a higher corrective bounce but so far I'm not seeing enough evidence to suggest a longer-term low is in place. Yesterday TYX dropped back below 2.5% yesterday, a price-level S/R line, and today it bounced back up to it. If that holds as resistance we'll likely see rates head lower, which would keep my prediction of sub-2% intact before seeing a longer-term bottom.

30-year Yield, TYX, Weekly chart

Speaking of bonds, I was a little surprised to see HYG (High Yield Corp bond fund, otherwise known as junk bonds) had not sold off that much (-0.26%). If today's selling in the stock market was a risk-off kind of move I would have thought investors would be reducing risk in this fund. It's worth watching over the next few days since it could be another piece of the puzzle telling us today's stock market selloff might not have been as bearish as it first appears.

If we look to the VIX for some clues, it was warning us that a reversal could be coming. The VIX had dropped down to its uptrend line from July-December 2014 last Friday and this past Monday and not surprisingly it bounced off that support line. The higher highs since last July, while SPX continued to make new price highs, have been indicating a bearish non-confirmation that's still waiting for resolution. The VIX is now back up near its 200-dma, at 14.94 (today's high was 14.75) so it could be ready for a pullback (while the stock market bounces). But VIX could be ready for a stronger "rally" off support.

Volatility Index, VIX, Daily chart

Another warning came from the VIX futures, VXX, which had poked through the bottom of its Bollinger Band this week and today's reversal back inside the band is generally a good "buy" signal here. As can be seen with the matching red circles on the SPX line (blue), these reversals off the Bollinger Band pierce have led to strong declines in the recent past (off the September and December 2014 highs). We'll soon find out if the pattern will repeat.

VXX vs. SPX, Daily chart

The banks had a bad day today as well and BKX dropped nearly -1.7%. The weekly chart below shows the red candle for this week that has already retraced the previous 5 weeks of trading. Falling away from the uptrend line from October 2013 - May 2014 (gray line) and its broken uptrend line from March 2009 - October 2011 clearly looks bearish. The back-test of the broken uptrend line from 2009, followed by this week's kiss goodbye is a classic sell signal and it tells me to look for bounces to short. I'll continue to respect the upside potential for a run up to the top of its expanding triangle, which is currently near 75.40, but I consider that a lower-odds probability (and we play a game of probabilities). Look for support at its 50-week MA, at 71.01, which is close to its 50-day MA AT 71.09. Slightly higher is its 200-dma at71.36 and only 13 cents below today's low.

KBW Bank index, BKX, Weekly chart

The TRAN started to lead to the downside on Monday and was a warning sign for the bulls to pay attention to. Last Friday's high was yet another lower high in a string of them since its November 28th high. While the DOW kept pushing higher the TRAN was not confirming the new highs and that has been leaving a Dow Theory bearish non-confirmation. But its price remains inside a potentially bullish descending triangle (flat bottom, declining tops) and this pattern follows the strong rally from October into November. It's a bullish continuation pattern and until it is negated with a breakdown, which means below 8580 (and stay below), we have to respect the potential for a rally out of this pattern. A rally above last Friday's high at 9176 is needed to prove the bullish pattern is correct but a drop below 8580 would also be a break below its 200-dma, currently near 8647, and its uptrend line from November 2012 - October 2014, also now near 8580. That's a must-defend level for the bulls.

Transportation Index, TRAN, Daily chart

For the U.S. dollar I was looking for the rally to finish just north of 99 but it instead rallied up to a high of a high around 99.50 but it made a little higher with a brief throw-over above the top of a steep parallel up-channel for the 3rd wave. I’m now expecting a multi-month 4th wave consolidation, which should stay above the top of a shallow parallel up-channel from 2008-2011, which is currently near 93.50. Below that level would have me wondering if something more bearish is happening for the dollar but if it does consolidate in a choppy pattern we could see commodities and metals forced to trade on their own for a while longer.

U.S. Dollar contract, DX, Weekly chart

Gold's decline from January 22nd looks like an impulsive 5-wave move and that keeps the dominant downtrend intact. It also means a bounce off last week's low could make it a little higher before heading back down, perhaps up to its 50-dma, near 1220, or its 200-dma, near 1239, or its 50-week MA near 1246. Currently it's battling its downtrend line from October 2012 - July 2014, which was tested with today's high at 1199.30. This downtrend line was broken in mid-January, getting gold bulls all excited, but it turned out to be a head-fake break after dropping back below the line in mid-February. For the time being I continue to view bounces in gold as shorting opportunities.

Gold continuous contract, GC, Weekly chart

When it looked like oil was going to find support last week at a Fib target zone near 42, especially with the bullish divergence against the January lows, I thought it was a good setup for a strong rally that will see oil challenge price-level S/R near 58.50. So far there's no change to that expectation although it will first need to get through resistance at its downtrend line from September-November 2014, currently near 50.10. We might see a pullback from that level before continuing higher.

Oil continuous contract, CL, Daily chart

It will be a quiet day for economic reports tomorrow so the market will be on its own, responding only to global news. Friday's GDP 3rd estimate and Michigan Sentiment could move the market but at the moment it's not looking like any big changes are expected for either one.

Economic reports and Summary

Today's selloff was clearly bearish and there's no good way to sugar coat it for the bulls. It's an impulsive decline off Monday's high and that's a strong signal of a trend change back to the downside. The decline from Monday can be counted as a completed 5-wave move and that sets up a bounce correction for Thursday. If there's no bounce and important support lines break then that's when we'll be hearing the fat lady singing the blues for the bulls. But for now the bulls have a chance to hold support if they come back in and do some buying in the morning. The higher-odds probability is that a bounce into Friday/Monday, assuming we'll get one, will set up a stronger decline to follow, especially with the bearish wave count setting up for a very strong 3rd of a 3rd wave down.

But before getting too bearish here, I've seen plenty of sharp pullbacks that looked like the start of something bigger to the downside that suddenly gets reversed and starts the next short-covering rally. That remains a possibility with important uptrend lines holding. Now we wait to see if they'll in fact hold.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying


New Option Plays

No One Catalyst

by James Brown

Click here to email James Brown

Editor's Note:

2015's Q1 is nearing an end and traders were rushing to lock in potential gains, especially in high-flyers like the biotech industry. Biotech stocks have been huge performers over the last couple of years. They were already up more than +20% in 2015 but now they could be reversing. The IBB ishares NASDAQ biotech ETF was down -4.1% today and marked its third down day in a row after Friday's blow-off top.

According to Bob Pisani, on CNBC, there was no one specific catalyst behind today's market decline. Worries about the strong U.S. dollar and its impact on corporate earnings has been a constant undercurrent for the market. Investors are also concerned that Q1 earnings could see the first decline in corporate profits in six years.

It didn't help that this morning's durable goods order missed expectations. Economists were expecting a gain in the durable orders but the government reported a decline.

We are not adding any new trades tonight. Volume has been low all week. Monday and Tuesday were the 2nd and 3rd slowest volume days of the year. Even with today's sharp decline volume was not that strong. This might suggest the selling isn't over yet. A big down day on huge volume can sometimes indicate a short-term bottom is in place.




In Play Updates and Reviews

Stocks Crushed As Sell-off Intensifies

by James Brown

Click here to email James Brown

Editor's Note:

The market's pullback accelerated on Wednesday with stocks down for a third day in a row. Disappointing economic data and worries over corporate earnings spooked investor sentiment. Semiconductor stocks, biotechs, and transportation names were all hammered pretty hard.

It was a very widespread decline. Commodities were one of the few things that rallied today.

AET, CAVM, CBRL, CRM, MNK, and UA all hit our stop loss.
ALKS hit our bearish entry trigger.


Current Portfolio:


CALL Play Updates

Jack in the Box, Inc. - JACK - close: 95.73 change: -3.41

Stop Loss: 95.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 616 thousand
Entry on March -- at $---.--
Listed on March 24, 2015
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Comments:
03/25/15: JACK reversed at resistance near $100.00. The market's sharp decline fueled a -3.4% drop in the stock. Shares are trading near the bottom of its trading range. If JACK does not rebound soon we'll likely remove it as a candidate. For the moment we are going to keep our entry trigger at $100.25.

Trade Description: March 24, 2015:
It's a burger-eat-burger world out there in the fast-food business. Jack in the Box is small fries compared to its larger rivals like McDonalds (36,258 locations) and Wendy's (6,515 locations). Let's not forget heavy weights like Taco Bell, Burger King, Subway, Dairy Queen, and a handful of pizza chains. JACK only has about 2,200 restaurants but it also has a secret weapon and that is the Qdoba Mexican Grill restaurant with about 600 locations. Chipotle Mexican Grill has almost 1,800 locations.

Some of that intense competition being felt by McDonalds and Chipotle Mexican Grill is coming from Jack in the Box and its Qdoba brand, which is growing sharply. A majority of their Qdoba franchisees own multiple stores with 10, 20 even 40 stores common. Enterprising business owners don't open additional stores if the original stores are not working. To have so many owners with high numbers of stores suggests the franchise is consistently profitable.

To be profitable they need solid customer traffic, good food and decent margins. Shares of JACK have been one of the best performers on the S&P over the last year because the company has been posting solid earnings and growth.

With analysts cutting earnings estimates for McDonalds and Chipotle because of competition in the sector it makes sense to look at what has happened at JACK. Over the last quarter and the last year not a single analyst has lowered their earnings estimates for JACK. According to Zacks there has been a noticeable trend of raising estimates. JACK is expected to grow +16% to +20% this year and in 2016. JACK has beaten earnings by an average of 6% over the last four quarters.

Because of the drop in gasoline prices consumers have more money in their pocket. Some of that money is going to end up in the cash registers at these fast food outlets. Customers are also trending towards healthier foods and away from the mass produced burgers and fries at McDonalds. Did you know there are 19 ingredients in McDonalds fries? Surely you didn't think they were just potatoes and grease? Restaurants like JACK and Chipotle are capitalizing on the healthy food craze. JACK store sales rose an average of 5.7% over the last three quarters but Qdoba sales rose +13% for the year and +7.7% in Q4. Zacks rates JACK as a strong buy.

The company plans to open 15 new Jack in the Box stores in 2015. They're also cashing in on Qdoba's success and planning to open 50 to 60 new Qdoba locations. That compares to just 12 new Jacks and 38 new Qdobas in 2014.

It's also worth noting that JACK has an active share buyback program and they reduced the share count by 10% over the last four quarters. Earnings growth rose +20% in Q3 after three years of consecutive earnings growth of more than 30%.

JACK's most recent earnings report was February 17th, when they reported their 2015 Q1 results. Analysts were expecting a profit of $0.87 a share on revenues of $461.2 million. JACK delivered earnings of $0.93 a share. That's a +24% improvement from a year ago. Revenues were up +4.1% to $468.6 million, above estimates. Their operating margins improved 1% to 19.3%.

Management expects same-store sales at Jack in the Box to surge from +0.9% a year ago to +5% to +7% in Q2. Qdoba same-store sales are forecasted to be in the +7% to +9% range. The company raised full-year 2015 guidance to $2.85-2.97 a share compared to Wall Street estimates of $2.84.

Shares of JACK surged on the earnings news and bullish guidance. Since the report that has been almost no profit taking. Now, after more than four weeks of consolidation, the stock looks poised to breakout past major, psychological resistance at the $100.00 mark. Tonight we're suggesting a trigger to buy calls at $100.25.

Trigger @ $100.25

- Suggested Positions -

Buy the JUN $105 CALL (JACK150619C105)

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

Option Format: symbol-year-month-day-call-strike


Lennox International - LII - close: 109.20 change: -0.76

Stop Loss: 106.75
Target(s): To Be Determined
Current Option Gain/Loss: -37.3%
Average Daily Volume = 417 thousand
Entry on March 23 at $110.96
Listed on March 19, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
03/25/15: LII held up reasonably well. The S&P 500 dropped -1.45% while LII only slipped -0.69%. If this market sell-off continues I would watch for LII to find technical support at the 20-dma (near 107.85). No new positions at this time.

Trade Description: March 19, 2015:
LII has been in business for over one hundred years. Lennox Intl. is part of the industrial goods sector. They offer residential cooling and heating products as well as commercial cooling and heating equipment. They are considered a global leader in the heating, air conditioning, and refrigeration markets. The residential business generates just over half of their annual sales.

The last couple of quarters have seen steady growth for LII. You can see the big gap higher in the stock price back in October 2014. That was a reaction to its Q3 earnings results. Their most recent report was February 2nd, 2015 where LII delivered its Q4 results.

Analysts were expecting a profit of $0.99 a share on revenues of $790 million. LII reported earnings per shares grew +32% to $1.02. Revenues were up +8.4% to $812.8 million, led by +13% sales growth in their residential segment.

Chairman and CEO Todd Bluedorn commented on his company's results,

"2014 was a year of strong growth and record profitability for Lennox International, led by 10% revenue growth at constant currency and 31% profit growth in our Residential business. In the fourth quarter, the company's momentum continued, with revenue up 10% at constant currency and total segment profit up 24%. Growth in the quarter continued to be led by Residential, with revenue up 14% at constant currency and profit up 57% from the prior-year quarter. In Commercial, revenue rose 8% at constant currency. Commercial profit was essentially flat with the prior-year quarter on headwinds from customer mix, foreign exchange, and investments related to our entrance in the VRF market. In Refrigeration, revenue was up 8% at constant currency. As expected, Refrigeration profit was down from the prior-year quarter by 45% due to the repeal of the carbon tax in Australia, North America product mix, and a negative impact from foreign exchange. We continue to expect Refrigeration revenue, margin and profit to be up in 2015 on continued growth in North America and improvement in Australia in the second half of the year. For the company overall in 2015, we expect another strong year of growth and record profitability, with strong cash generation for investments to drive growth as well as to return cash to shareholders."
Last year LII earnings rose more than +20% to $4.23 a share. They are forecasting $5.20-5.60 per shares in 2015 (+22.9% to +32.3%) versus Wall Street estimates of $5.42 per share.

Shares have been a steady performer the last few months with a bullish trend of higher lows and higher highs. The point & figure chart is bullish with a $140 target. Today shares of LII are hovering just below round-number resistance at $110. We are suggesting a trigger to buy calls at $110.25.

- Suggested Positions -

Long JUN $115 CALL (LII150619C115) entry $2.55

03/23/15 triggered on gap open at $110.96, suggested entry was $110.25
Option Format: symbol-year-month-day-call-strike


Northrop Grumman Corp. - NOC - close: 159.19 change: -2.90

Stop Loss: 158.45
Target(s): To Be Determined
Current Option Gain/Loss: -57.8%
Average Daily Volume = 1.4 million
Entry on March 19 at $163.50
Listed on March 18, 2015
Time Frame: Exit prior to May option expiration
New Positions: see below

Comments:
03/25/15: Defense stocks were also crushed today. NOC held up a little bit better than its peers. Unfortunately shares did breakdown under what should have been support near $160.00 and the bottom of its bullish channel.

More conservative traders may want to hit the sell button tomorrow morning. NOC does look poised to hit our stop loss at $158.45. I am not suggesting new positions.

Trade Description: March 18, 2015:
The United States spends more on its defense budget than any other country in the world. The Budget Control Act of 2011 led to the sequestration budget cuts of $1.2 trillion. Half of that spending reduction is taken out of the U.S. defense budget from 2013-2021 (nine years).

Now pretend you are a defense contractor. You might think that having your biggest customer cut their budget would send your revenues and your stock price lower. That has not been the case for the major defense players. While it is true that many defense companies did see slower sales to the U.S. their stocks have delivered significant gains since the sequester.

I should note that part of the defense cuts have been delayed or amended with various short-term deals in Washington but the sequester is poised to return to full power in 2016. Law makers are already trying to find a way around it. Meanwhile, both 2013 and 2014 saw stocks like NOC outperform the broader market averages. That relative strength has continued into 2015, even after the recent correction.

According to their company website, "Northrop Grumman is a leading global security company providing innovative systems, products and solutions in unmanned systems, cyber, C4ISR, and logistics and modernization to government and commercial customers worldwide." What does that mean? It means NOC makes bombers, unmanned drones, cyber security solutions, and logistics. If you're curious, C4ISR stands for command, control, communications, computers, intelligence, surveillance, and reconnaissance.

The fact that the world seems to be growing more dangerous, not less dangerous, should be a bullish undercurrent that lifts the defense sector. NOC should benefit because the American public does not have the stomach for another war. That means the U.S. will use more and more unmanned technology like NOC's drones.

NOC has consistently delivered on the earnings front. Not only has NOC beaten expectations but they have raised their guidance the last five quarters in a row. A key driver has been a push to diversify their customers base so they're not so reliant on the U.S.

The company's Q4 report was released on January 29th. Wall Street was expecting a profit of $2.25 a share on revenues of $5.99 billion. NOC delivered earnings of $2.48 per share, up +17% from a year ago. Revenues slipped -0.8% but came in better than expected at $6.11 billion. Their profit margin improved and their backlog at the end of 2014 was $38.2 billion compared to $37 billion the prior year.

Management raised their 2015 earnings guidance into the $9.20-9.50 range and their revenue guidance up to $23.4-23.8 billion. This is above Wall Street's estimate of $9.12 on revenues of $23.5 billion.

The stock peaked near $172 about four weeks ago. Since then NOC, like most of the defense stocks, have seen a correction. NOC was down -9% from its high as of last Friday's low. Yet the point & figure chart is still bullish and forecasting a long-term target of $210.

We like how NOC has kept the bullish trend of higher lows alive. Now, after consolidating sideways in the $158-162 zone the last few days, the current bounce looks like an potential entry point. Tonight we're suggesting a trigger to buy calls at $163.50.

Caveat: The U.S. Air Force is expected to make a big decision in spring or summer this year. That decision is who will make America's next-generation bomber. The program is called the Long Range Strike-Bomber (LRS-B) and will be worth tens of billions of dollars to the winning contractor. This is a major fight between defense contractors like NOC and rivals Boeing (BA) and Lockheed Martin (LMT). If NOC loses this opportunity it could hurt the stock price.

- Suggested Positions -

Long MAY $170 CALL (NOC150515C170) entry $2.25

03/19/15 triggered @ 163.50
Option Format: symbol-year-month-day-call-strike




PUT Play Updates

Alkermes plc - ALKS - close: 62.46 change: -3.82

Stop Loss: 69.05
Target(s): To Be Determined
Current Option Gain/Loss: +23.3%
Average Daily Volume = 1.26 million
Entry on March 25 at $64.90
Listed on March 23, 2015
Time Frame: exit PRIOR to May option expiration
New Positions: see below

Comments:
03/25/15: Our new trade on ALKS is open. The stock erased yesterday's bounce and accelerated lower. Our trigger to buy puts was hit at $64.90. ALKS underperformed the broader market with a -5.7% decline.

Trade Description: March 23, 2015:
Biotech stocks have been some of the market's best performers, especially off the October 2014 lows. The group may have gotten ahead of itself with significant gains in recent weeks. The last couple of days the biotech ETFs are flashing what might signal a potential top. Meanwhile one stock that has been underperforming its peers is ALKS.

You might not be familiar with ALKS. The company is part of the healthcare sector. According to their marketing materials, "Alkermes plc is a fully integrated, global biopharmaceutical company developing innovative medicines for the treatment of central nervous system (CNS) diseases. The company has a diversified commercial product portfolio and a substantial clinical pipeline of product candidates for chronic diseases that include schizophrenia, depression, addiction and multiple sclerosis. Headquartered in Dublin, Ireland, Alkermes plc has an R&D center in Waltham, Massachusetts; a research and manufacturing facility in Athlone, Ireland; and manufacturing facilities in Gainesville, Georgia and Wilmington, Ohio."

The company's most recent earnings report was February 24th. They beat expectations on both the top and bottom line. Unfortunate for shareholders management lowered their 2015 revenue guidance. Since its report shares have broken down. The stock has seen a couple of analyst downgrades (or lowered price targets). The point & figure chart has turned bearish and is currently forecasting at $54.00 target.

You can see the gap down on the earnings news. ALKS struggled to rebound and when it did traders immediately sold the stock at resistance. Now it's on the verge of breaking down bellow support near $65.00. The $60.00 level is potential support but there is a chance shares drop toward their 200-dma closer to $55. Tonight we are suggesting a trigger to buy puts at $64.90.

I want to remind readers that biotech stocks can be volatile. We should consider this a more aggressive, higher-risk trade.

- Suggested Positions -

Long MAY $60 PUT (ALKS150515P60) entry $2.15

03/25/15 triggered @ 64.90
Option Format: symbol-year-month-day-call-strike



CLOSED BULLISH PLAYS

Aetna Inc. - AET - close: 107.29 change: -1.45

Stop Loss: 107.45
Target(s): To Be Determined
Current Option Gain/Loss: +155.9%
Average Daily Volume = 2.2 million
Entry on March 04 at $101.15
Listed on March 02, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
03/25/15: AET was not immune to the market's widespread sell-off on Wednesday. Shares fell -1.3% and broke down under short-term support at $108.00. Our stop loss was hit at $107.45.

I'd keep AET on your watch list. A dip near the $100-102 zone might be a new entry point.

- Suggested Positions -

Apr $105 CALL (AET150417C105) entry $1.36 exit $3.48 (+155.9%)

03/25/15 stopped out
03/21/15 new stop @ 107.45
03/16/15 new stop @ 102.85
Our option has more than doubled. Traders might want to take some money off the table here.
03/04/15 triggered @ 101.15
Option Format: symbol-year-month-day-call-strike

chart:


Cavium, Inc. - CAVM - close: 67.75 change: -4.48

Stop Loss: 71.65
Target(s): To Be Determined
Current Option Gain/Loss: +2.6%
Average Daily Volume = 737 thousand
Entry on February 27 at $68.75
Listed on February 26, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
03/25/15: Semiconductor stocks got whacked today with the SOX index down -4.6%. Shares of CAVM, which were trading at new highs just a few sessions ago, was crushed with a -6.2% decline today. Our stop loss was hit at $71.65.

- Suggested Positions -

JUN $75 CALL (CAVM150619C75) entry $3.80 exit $3.90 (+2.6%)

03/25/15 stopped out
03/21/15 new stop @ 71.65
03/17/15 new stop @ 68.45
03/07/15 new stop @ 67.65
02/27/15 triggered @ $68.75
Option Format: symbol-year-month-day-call-strike

chart:


Cracker Barrel - CBRL - close: 150.08 change: -5.56

Stop Loss: 149.85
Target(s): To Be Determined
Current Option Gain/Loss: -63.7%
Average Daily Volume = 320 thousand
Entry on March 20 at $156.57
Listed on March 17, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
03/25/15: CBRL was hit hard with a -3.5% decline. The stock broke through multiple-short-term support levels and pierced the $150.00 mark. Our stop was hit at $149.85.

- Suggested Positions -

JUN $160 CALL (CBRL150619C160) entry $7.05 exit $2.56 (-63.7%)

03/25/15 stopped @ 149.85
03/20/15 triggered on gap open at $156.57, suggested entry was $155.55
Option Format: symbol-year-month-day-call-strike

chart:


Salesforce.com, Inc. - CRM - close: 65.78 change: -1.59

Stop Loss: 66.45
Target(s): To Be Determined
Current Option Gain/Loss: -33.3%
Average Daily Volume = 4.5 million
Entry on March 17 at $66.75
Listed on March 16, 2015
Time Frame: Exit prior to May option expiration
New Positions: see below

Comments:
03/25/15: The NASDAQ underperformed the other big cap indices today with a -2.3% decline. CRM kept pace with a -2.3% drop and hit our stop at $66.45.

- Suggested Positions -

MAY $70 CALL (CRM150515C70) entry $1.95 exit $1.30 (-33.3%)

03/25/15 stopped out
03/23/15 new stop @ 66.45
03/21/15 new stop @ 65.45
03/20/15 CRM reversed at $70.00 resistance and generated a bearish engulfing candlestick reversal pattern.
03/17/15 triggered @ 66.75
Option Format: symbol-year-month-day-call-strike

chart:


Mallinckrodt - MNK - close: 126.66 change: -3.02

Stop Loss: 128.65
Target(s): To Be Determined
Current Option Gain/Loss: +29.3%
Average Daily Volume = 1.3 million
Entry on March 16 at $125.29
Listed on March 14, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
03/25/15: Biotech-related stocks were getting crushed today. MNK fared better than most but still lost -2.3%. Shares hit our stop at $128.65 before lunchtime.

- Suggested Positions -

JUL $130 CALL (MNK150717C130) entry $7.50 exit $9.23 (+23.1%)

03/25/15 stopped out
03/21/15 new stop @ 128.65
03/17/15 new stop @ 125.25
03/16/15 new stop @ 121.85
03/16/15 triggered on gap open at $125.29, suggested trigger was $125.15
Option Format: symbol-year-month-day-call-strike

chart:


Under Armour, Inc. - UA - close: 79.45 change: -2.05

Stop Loss: 79.65
Target(s): To Be Determined
Current Option Gain/Loss: +17.6%
Average Daily Volume = 2.1 million
Entry on March 17 at $77.60
Listed on March 12, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
03/25/15: UA is another example of traders selling their winners. The stock was trading at all-time highs just a couple of days ago. Today the market's sell-off drug UA below $80.00 and hit our stop at $79.65.

I would keep UA on your watch list. A dip in the $75.00-77.50 zone might be a new entry point.

- Suggested Positions -

JUL $80 CALL (UA150717C80) entry $4.09 exit $4.81 (+17.6%)

03/25/15 stopped out
03/21/15 new stop @ 79.65
03/18/15 be prepare for possible volatility on Friday morning as UA reacts to Nike's earnings out Thursday night.
03/17/15 new stop @ 75.95
03/17/15 triggered @ 77.60
Option Format: symbol-year-month-day-call-strike

chart: